As a small business owner it is important to organize your finances and stay on top of them, especially when you want to apply for financing. Getting familiar with bank transactions that trigger fees is crucial. These transactions are known as: non-sufficient funds and overdraft fees. Both of them relate to insufficient funds and can trigger unwanted fees for your business.
Overdraft fees take place when you don’t have enough money in an account to cover various types of transactions, meanwhile, non-sufficient funds fees when your checking account lacks sufficient funds to cover for a purchase, transfer or withdrawal.
Regardless of the type of business transaction you are dealing with, it is important to understand how this can affect your business, what are the potential negative consequences, and ways to stay away from these.
Non-Sufficient Funds
Non-sufficient funds, also referred to as insufficient funds, is a banking term used whenever the checking account does not have a sufficient balance (or any balance at all) to cover a transaction or payment. They can also be referred to as bounced cheques. This could happen because you forgot to transfer money into that particular account or simply because you just do not have the funds available.
Whenever this happens, the bank might decide to pay or return the item unpaid and then charge an non-sufficient funds fee. You may also experience an additional charge from the payee, or at times, the payee could get a charge from their bank for depositing a bad check.
How Can You Fix This?
The simple solution is that you will need to deposit more money into your checking account and/or write a new check.
Now that you know what a non-sufficient fund is and how to fix it, you may be wondering about the larger impact this could potentially have on your small business’s finances. Here are a couple of examples:
Consequences
Whenever you deal with non-sufficient funds on your bank statement, there are several consequences you might have to deal with:
Penalties
If you face a situation where your check bounces, first and foremost you might get penalized by your bank institution. Moreover, if the bounced cheque is for the payment of a loan, you could face additional late payment charges. Penalty charges vary based on bank and account types.
Negative impact on credit score
A bounced cheque can also negatively impact your creditworthiness. For instance, if you plan to apply for a loan, financial institutions may feel insecure about lending to someone who has a couple of non-sufficient funds showing on their recent bank statements. This is because dealing with multiple of them indicates that you have failed to pay previous debt. While a bounced cheque does not get reported to a credit bureau, nonetheless, there are two scenarios you should avoid:
- A late payment resulting from a cheque that has been dishonoured may be reported to credit bureaus.
- Not paying your balance or the non-sufficient fund fee could take your debt to collections.
These two can have an impact on your business or personal credit score.
So, how can you avoid this? It’s always advisable that you have enough funds in order to avoid NSFs whenever you apply for a loan. By doing so, financial institutions will be secure with your financial credibility, making it easier for them to lend you money. Although NSFs are a factor that is considered when applying for financing, it does not mean an automatic exclusion for alternative lenders such as Merchant Growth.
Other consequences
After experiencing multiple NSF’s a bank may decide to close your account or even deduct money from your account.
How to Avoid NSFs
The easiest way for you to avoid dealing with non-sufficient funds is to budget accordingly and forecast any upcoming expenses. But here are some other things you can start doing as a small business owner.
Keep track of your balances
Being organized is key to avoiding dealing with non-sufficient funds. These are some things to keep in mind:
- Take the time to frequently review your transactions.
- Keep track of your expenses: you can create a spreadsheet or download a budgeting app to help plan your monthly expenses.
If you keep these things in mind you will know how much you can spend, and how to account for any unexpected changes or costs.
Set up alarms with your bank
Setting alarms can help you keep track of which payments are going through. This will allow you to prepare accordingly, for instance if a scheduled payment is coming up, you have the opportunity to cancel or reschedule the payment if possible. There is also the option of setting up alarms that let you know when your bank account balance is low, so you can act accordingly before facing a non-sufficient fund fee.
Monitor your checking account regularly
It’s a good habit to keep an eye on your checking account balance and posted transactions. Take a look at the transactions that have cleared and the ones that are still pending.
Keep extra funds in your account
Add extra money to your account, in addition to the funds already there to cover your regular expenses. This money can then serve as a protection against NSFs if there is a sudden unplanned charge.
Link your account to a savings account
Some banks allow you to link a savings account to your checking account, if you overdraw on your checking account, the bank moves funds from the linked account to cover any pending transactions.
Outsource help when needed
If you find yourself overwhelmed with tracking your expenses and managing your finances, there is always the option to hire an accountant that could keep your financial needs organized.
Sign up for overdraft protection services
An overdraft protection service can allow you to avoid dealing with non-sufficient funds. There is a fee for such services. This can range from $2.50 to $5, but this will authorize the bank to make a purchase for a flat fee whenever you face a failed transaction.
How to Move on From Non-Sufficient Funds
In the end, it all comes down to getting your finances organized and understanding the different types of transactions you might face along the way. Luckily, there are a couple of things you can add and keep track of to strengthen your money management strategy. Fortunately, Merchant Growth is here to offer small business owners the most convenient and accessible financing experience, and we take into account a multitude of factors, examining the overall health of a business, not just a single factor.
